Job costing involves the detailed accumulation of production costs attributable to specific units or groups of units. For example, the construction of a custom-designed piece of furniture would be accounted for with a job costing system. The costs of all labor worked on that specific item of furniture would be recorded on a time sheet and then compiled on a cost sheet for that job. Similarly, any wood or other parts used in the construction of the furniture would be charged to the production job linked to that piece of furniture. This information may then be used to bill the customer for work performed and materials used, or to track the extent of the company's profits on the production job associated with that specific item of furniture.
Process costing involves the accumulation of costs for lengthy production runs involving products that are indistinguishable from each other. For example, the production of 100,000 gallons of gasoline would require that all oil used in the process, as well as all labor in the refinery facility be accumulated into a cost account, and then divided by the number of units produced to arrive at the cost per unit. Costs are likely to be accumulated at the department level, and no lower within the organization.
Job costing and process costing can be used in both manual and computerized accounting environments.
Given these descriptions of job costing and process costing, we can arrive at the following differences between the two costing methodologies:
Uniqueness of Product
Job costing is used for unique products, and process costing is used for standardized products.
Size of Job
Job costing is used for very small production runs, and process costing is used for large production runs.
Record Keeping
Much more record keeping is required for job costing, since time and materials must be charged to specific jobs. Process costing aggregates costs, and so requires less record keeping.
Customer Billing
Job costing is more likely to be used for billings to customers, since it details the exact costs consumed by projects commissioned by customers.
Hybrid Systems
In situations where a company has a mixed production system that produces in large quantities but then customizes the finished product prior to shipment, it is possible to use elements of both the job costing and process costing systems, which is known as a hybrid system.
Chapter 4Process CostingSimilarities Between Job-Order and Process Costing:•Both systems assign material, labor and overhead costs toproducts and they provide a mechanism for computing unitproduct cost.•Both systems use the same manufacturing accounts, includingManufacturing Overhead, Raw Materials, Work in Process, andFinished Goods.•The flow of costs through the manufacturing accounts isbasically the same in both systems.Differences Between Job-Order and Process Costing:•Process costing is used when a single product is produced on acontinuing basis or for a long period of time (the mixing andbottling of Coca-Cola).Job-order costing is used when manydifferent jobs are worked on each period.•Process costing systems accumulate costs by department. Job-order costing systems accumulated costs by individual jobs.•Process costing uses a fundamental document called adepartment production report, while job-order costing uses thejob cost sheet.•Process costing systems compute unit costs by department. Job-order costing systems compute unit costs by job on the job costsheet.Processing Departments:1
A processing department is any location in an organizationwhere materials, labor, or overhead are added to the product.The activities performed in a processing department areperformed uniformlyon all units of production.The output from a processing department is homogeneous, thatis, they all appear the same.Cost Flow in Process Costing:In all manufacturing systems, direct material, direct labor, andmanufacturing overhead are charged to Work in ProcessInventory. As we complete the production process, goods aretransferred to the Finished Goods Inventory. Finally, when wesell the finished goods, we transfer the cost to cost of goods sold.In a process costing systems, costs are traced to departmentsthat process the goods. In some companies there may be severalprocessing departments that goods must pass through to becomefinished goods. Material, labor and overhead costs transferredfrom one department’s Work in Process account to anotherdepartment’s Work in Process account are called transferred-incosts.Example:Let’s look at the flow of costs through the T-accounts andrelated journal entries for a manufacturing process that has twodepartments – Department A and Department B.Materials Costs:The journal entry that shows the requisition of direct materialsfor use in Processing Departments A and B, is to debit the2
processing department of the direct materials requisitioned andcredit Raw Materials Inventory. Notice that the direct materialsare placed into a separate work in process account for eachprocessing department as shown below:Work in Process Department ADirect MaterialsxxxxxWork in Process Department BDirect MaterialsxxxxxRaw MaterialsDirect MaterialsxxxxxDirect Labor:Direct labor is transferred from the wages payable account intothe work in process account of departments A and B depending